PENNY'S BAY INVESTMENT CO LTD v. DIRECTOR OF LANDS

FACV No. 8 of 2009

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 8 OF 2009 (CIVIL)

(ON APPEAL FROM CACV NO. 176 OF 2007 AND
CACV NO. 177 OF 2007 (CONSOLIDATED))

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JUDGMENT ON COSTS

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Mr Justice Ribeiro PJ :

1.  On 26 March 2010, the Court handed down judgment[1] on questions of law framed as preliminary issues in relation to the claim of Penny’s Bay Investment Co Ltd (“PBIL”) for compensation for injurious affection under the Foreshore and Sea-bed (Reclamations) Ordinance[2] (“the Ordinance”).  Written submissions on costs have now been received from the parties.  The costs with which we are concerned are those in the Court of Appeal (where the Director had been ordered to pay the costs) and the costs of the proceedings before this Court. 

2.  The parties are sharply at odds as to who was the substantive “winner” and as to the costs order which ought consequently to be made.   PBIL contends that it should have all the costs, certified fit for three counsel, on the basis that the Court essentially endorsed the position that it had consistently maintained and rejected the Director’s arguments on the questions of law determined.  For her part, while conceding that the Court decided one of three main issues in favour of PBIL, the Director argues that she succeeded on the other two issues and secured a financially favourable outcome so that PBIL ought to be ordered to pay 75% of her costs.

3.  To resolve this difference between the parties, it is necessary briefly to examine the Court’s decision regarding the three issues identified.  The facts are set out in the judgment of Lord Hoffmann NPJ.[3]  In summary, on 5 May 1995, the Director gave notice of a proposed reclamation which, if carried out, would eliminate PBIL’s access to the sea and put an end to its ship building and repairing business.  This was done in the context of plans published in 1994 for the construction of a container terminal on the site of the proposed reclamation.  The Government then changed its mind and, on 10 April 2000, revoked the 1995 authorisation and then issued a new notice concerning reclamation for the purpose of constructing a Disneyland theme park on the site.  In the meantime, PBIL’s shipbuilding business had not been disturbed.  The Government later acquired a surrender of PBIL’s lease for about $1.5 billion on 3 April 2001.

4.  As Lord Hoffmann NPJ explained, the question in the appeal was “how the compensation which had become payable by virtue of the 1995 authorisation should be calculated and, in particular, the effect (if any) of the subsequent events”.[4]  More particularly, the dispute was “about how the compensation should be assessed in the light of the facts that the original authorisation had been revoked and that there had been no actual interference with marine access before the company surrendered its lease.”[5]

5.  The first issue identified by the Director was as to whether the events which occurred subsequent to the 1995 notice were relevant to assessing the compensation.   Lord Hoffmann NPJ summarised the respective arguments of the parties as follows:[6]

“PBIL’s view was that subsequent events were irrelevant. The compensation should be the difference between the value of its land on 5 May 1995 without the reclamation and its value on the assumption that on that date the reclamation had taken place. ...”

“The Government’s view was that the notice of authorisation should be treated as if it had been a tort by which PBIL’s marine rights were wrongfully extinguished on that date. In accordance with general principles of tort law, damages should be the loss which, at the time of the hearing in the Tribunal, could be proved to have been caused by the notional tort, together with an estimate of any loss which would occur in the future. In this case, that would mean any loss which was caused by the situation of the ship building business being precarious after the authorisation and before the sale, together with the difference in the price for which the lease had been surrendered and what its value would have been with marine rights.”

6.  On this issue, it is plain (as the Director accepts) that PBIL’s argument was preferred to that of the Director.  The Court held that on the true construction of the Ordinance:

“... the reclamation is treated as having taken place on the date of publication of the authorisation and the compensation is the difference between the open market value of land in actual enjoyment of its marine rights and its open market value when deprived de facto as well as de jure of its access to the sea.”[7]

And that nothing which happened after that date can affect the valuation:

“The value of a property means the price which it would have fetched on a sale in the open market between a willing seller and a willing purchaser on the relevant date. That obviously cannot be affected by what happened afterwards.”[8]

7.  The second issue is where the real controversy regarding costs arises.  It involves what Lord Hoffmann NPJ called the Government’s alternative argument, running as follows:

“If the correct measure was the difference between the value on 5 May 1995 with marine rights and its value after their extinction, the latter valuation should also take into account that the container terminal scheme was expected to bring road connections to PBIL’s land which would increase its value, probably more than any diminution caused by the loss of marine rights. So no compensation would be payable.”[9]

8.  The Director contends that this issue was decided in her favour “in that account is to be taken in the comparative 1995 valuations of the effect on value of the then anticipated container port.” This is an argument based on paragraphs 44 to 46 of the judgment in which the Court recognized that in valuing the land before and after the extinguishment of PBIL’s marine rights respectively, it would be appropriate to take into account the existence of expectations, if any, regarding possible enhancement to the value of the land arising from road transport improvements that might accompany the proposed container port.  The Director submits that, accordingly, if her evidence is accepted “it may mean that the present huge claim is eliminated or reduced to comparatively small proportions”, justifying a costs order in her favour.

9.  We cannot accept the Director’s submission.  In the first place, Lord Hoffmann NPJ’s remarks in paragraphs 44 to 46 were not an acceptance of the Government’s alternative argument.  That argument was that enhancement to the value of the land by reason of an anticipated road network associated with a container port should only be taken into account in “the latter valuation”, that is, the valuation after extinction of the marine rights, thereby effectively nullifying PBIL’s claim.  That argument was rejected.  The Court held that:

“...the prospect of new uses for the land, and the increased value which that may have generated, would have entered into the valuations both with and without access to the sea.” (emphasis supplied)

The Court saw no basis for taking the increased value into account only in the “after” valuation and ignoring it on the “before” side of the ledger.

10.  Secondly, the Court was certainly not purporting to decide that any such expectations in fact existed or, if they did exist, what their impact on the valuation might be.  Far less was the Court purporting to decide that such expectations would result in a valuation financially favourable to the Director, as opposed, for instance, to being mutually off-set in the “before” and “after” valuations.  The Court emphasised that:

“Whether such expectations existed and the extent, if any, to which they would have affected the open market value of the land is a matter for evidence when the valuation comes to be done.”[10]

11.  PBIL were accordingly substantively the “winners” on the second issue as raised and argued by the Director.  The Court’s decision does not deal with any evidential issues or outcomes and does not necessarily mean that a financially favourable result will be achieved by the Director in the exercise of assessing compensation.

12.  The third issue identified by the Director involved PBIL’s attempted reliance on Article 105 of the Basic Law.  Although canvassed in the written cases, the point was not addressed in oral argument.

13.  In our view, costs should follow the event, being awarded in favour of PBIL which succeeded on both substantive points.  It is fair to regard the Basic Law point as a weak one, but it played an insignificant part in the proceedings and does not affect the application of the usual costs principle.

14.  Neither should its operation be affected by two other features of the present appeal.  First, it is true that the Director was the Appellant in this Court and that the appeal resulted in the Court of Appeal’s Order being set aside.  However, that did not reflect a victory on the Director’s part.  It was necessary to set that Order aside because it was, with respect, self-contradictory and confusing.  By its paragraph 2, it directed that the valuation should take place on a “before and after” basis as at 5 May 1995, but it then went on (in paragraph 3) to direct the Lands Tribunal to “consider and determine how” certain subsequent events were relevant and might be taken into account.  As Litton NPJ pointed out, this was an unsatisfactory order that effectively determined nothing.

15.  Secondly, while the Court criticised adoption of the preliminary issue procedure, PBIL should not be singled out for blame regarding any unsatisfactory consequences of taking that course.  As Rogers VP pointed out,[11] PBIL were driven to seek the trial of preliminary issues by the Government’s “vacillating approach coupled with the imprecise contentions” put forward in correspondence so that its attitude to compensation was unclear “nearly 10 years after the 1995 authorization”.[12]  Moreover, although the preliminary issue approach did give rise to analytical difficulties, the Court’s judgment clearly provides the parties with guidance on the legal principles applicable to the assessment of statutory compensation, resolving difficult questions of construction and narrowing the issues which will require evidential investigation.

16.  We accordingly direct that the Director do pay PBIL’s costs of this appeal and of the appeal before the Court of Appeal, including the costs of the written submissions on costs, certified fit for three counsel, to be taxed if not agreed.